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Suit alleges `inadequate oversight' of Intrust
March 8, 2001
BY TAMMY WILLIAMSON BUSINESS
REPORTER
Investors stung by losses at Independent Trust Corp., the Orland
Park company seized by regulators last year after $68.1 million was
discovered missing, have turned their ire toward the state regulator
of trust companies.
Two investors have sued the Illinois Office of
Banks and Real Estate for nearly $90 million, alleging
"negligent and wantonly inadequate regulation and
oversight" of Independent Trust, also known as Intrust. They
want the lawsuit to be expanded to include all investors.
Rapid City, S.D., investor James Matkins and West Chester,
Pa.-based Aztec Management Services Inc. say the Office of Banks and
Real Estate knew of problems at Intrust for "at least" six
years but did little to stop them, according to the lawsuit filed in
the Illinois Court of Claims.
They contend the Office of Banks knew that Independent Trust had
transferred some of its funds to an affiliated company, Intercounty
Title Co. of Illinois, as far back as 1994, but did little to
enforce rules to make Intercounty give the money back.
There are about 17,000 accounts with
$1.7 billion of assets at Intrust. A criminal investigation is
under way, but no charges have been filed in what is the largest
financial fraud case in Illinois history.
"The insolvency of Intrust was the first
failure of an Illinois trust company since 1934, and it rocked the
public's confidence in the stability of the state's financial
institutions," the lawsuit says. The Office of Banks "did
absolutely nothing to investigate, or ensure the discontinuance of,
the numerous flagrant inadequacies of the company," the suit
alleges.
The Office of Banks shut down Intrust last April and appointed
PricewaterhouseCoopers as the receiver in charge of figuring out how
to make up for the $68.1 million shortfall. Last week, a Cook County
Circuit Court judge approved its plan to assess investors 8.69
percent of their investment value. Attorneys representing investors
are expected to ask the court next week to delay the assessments
while appeals of related rulings await hearings in the Illinois
Appellate Court.
According to court documents, Intrust began transferring some of
its money to Intercounty back in 1990. The president of Intercounty,
Laurence Capriotti, and Intercounty's secretary, Jack Hargrove, were
members of Intrust's three-member board of directors.
Beginning in 1994, the Office of Banks began sending letters to
Intrust, telling the company its "business practices were
unsound and illicit," according to the suit. But, "in
disregard of its own stark conclusions, (the Office of Banks) took
no action to investigate Intrust further," the suit alleges.
The Office of Banks on several occasions told Intrust to
"establish a separate trust account" for its money because
Intrust was violating state law by having money at Intercounty
because the account was set up so only Intercounty could withdraw
money.
Investor Matkins had deposited more than $16,000 in a trust
account with Intrust, and will lose $1,717 from the court-approved
assessment. Aztec Management had more than $44,000 at Intrust, court
documents said.
Both also contested the $2.1 million in fees that have been paid
to PricewaterhouseCoopers out of investors' pockets.
The investors contend the Office of Banks misled them, according
to court documents. Aztec and Matkins said they contacted the Office
of Banks on Sept. 14, 1999, and were told Intrust was in "good
standing." Yet the next day, the regulator issued a
"corrective order" that demanded Intrust to get its money
back from Intercounty.
The Office of Banks said that until Intrust was placed into
receivership, it didn't know any money was missing.
"We can understand the frustration that the beneficiaries
feel," said Dale Turner, the regulator's general counsel. But
the regulator has also allowed depositors to get to their money
(Intrust accounts have been and are still frozen until the
assessment is done) by working with PricewaterhouseCoopers to clear
up the mess, Turner said.
The two investors are seeking class-action status, so that other
investors hurt in the Intrust scandal can join the suit. A judge
would have to approve the status.
The lawsuit isn't the first time investors have complained about
the role the regulator played--or didn't--in Intrust.
Last fall, investors fired off dozens of letters
to Gov. Ryan and legislative leaders seeking an investigation into
the Office of Banks. "It is reprehensible that we, the account
holders . . . be charged for the missing $68 million when our tax
dollars are paying for proper supervision by a state government
regulator," the form letter said.
"I believe that many of our clients feel that the (Office of
Banks) failed to do its job," said Daniel Graham, an attorney
with Levin & Funkhouser. Graham is one of a group of attorneys
representing more than 500 investors in Cook County and Illinois
Appellate courts. He said it's "way to soon to say" if his
clients would join the new lawsuit.
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